Equity Indices Policies & Practices Methodology

Transcription

1 Equity Indices Policies & Practices Methodology S&P Dow Jones Indices: Index Methodology October 2017

2 Table of Contents Introduction 3 Additions and Deletions 4 Mergers & Acquisitions 5 Spin-Offs 6 Treatment of Spin-Offs in Certain Equal Weighted and Modified Market Cap Weighted Indices 7 Share and IWF Updates 9 Rebalancing Guidelines Share/IWF Freeze 10 Multiple Share Classes 10 Depositary Receipt Shares 11 Dividends, Stock Splits and Consolidation 12 Dividends 12 Regional Variations in the Treatment of Cash Dividends 13 Post Ex-date Dividend Adjustment 15 Foreign Exchange Conversions for Dividends 16 Multiple Dividend Distributions on a Single Day 16 Dividend Not Quoted Ex by the Exchange 16 Bonus Issues of Shares Not Entitled To Cash Dividend 16 Total Return and Net Return Indices 17 Stock Split and Consolidation 17 Rights Offerings (or Rights Issues ) 19 S&P Dow Jones Indices Calculation of Rights Offerings 19 Equal Weighted and Modified Market Cap Weighted Indices 21 Warrants, Options, Convertible Bonds, Other Ineligible Securities & Share Types 21 Treatment of Corporate Actions on Exchange Holidays 24 Price Adjusting Corporate Actions 24 Non-Price Adjusting Corporate Actions 24 Bankruptcies & Stock Suspensions 25 Bankruptcies 25 Long-Term Stock Suspensions 25 Short-Term Stock Suspensions 26 S&P Dow Jones Indices: Equity Indices Policies & Practices 1

3 Domiciles 27 Policy 27 Unexpected Exchange Closures 29 U.S. Securities 29 International Securities 29 Treatment of Corporate Actions 30 Rebalancing 32 Recalculation Policy for S&P Dow Jones Indices Branded Indices 33 Index Governance 35 Index Committee 35 Quality Assurance 35 Internal Reviews of Methodology 35 Index Policy 37 Announcements 37 Pro-forma Files 37 Holiday Schedule 37 Exchange Rate 37 Corporate Actions Applicable to Domestic Investors Only 37 Special Index Variations 38 Calculations and Pricing Disruptions 38 Other Adjustments 39 Expert Judgment 39 Data Hierarchy 39 Contact Information 39 Appendix I Definitions and Terms 40 Rights Offering Terms and Definitions 40 Spin-Off Terms and Definitions 43 Mergers & Acquisitions Terms and Definitions 44 Appendix II Methodology Changes 47 Disclaimer 51 S&P Dow Jones Indices: Equity Indices Policies & Practices 2

4 Introduction This document covers corporate action treatment, per S&P Dow Jones Indices equity indices policies and practices. To understand and successfully use indices for investment analysis, it is important to know how adjustments are made, when different kinds of corporate actions occur, and S&P Dow Jones Indices treatment of these events. The goal is to provide transparency and offer consistency in the global treatment of corporate actions, to the greatest extent possible. Please note, however, that local market practices may dominate major decisions, so S&P Dow Jones Indices has general approaches with exceptions and/or special rules that pertain to certain markets. To the extent possible, the implementation and timing is the same across all S&P Dow Jones Indices branded indices. S&P Dow Jones Indices: Equity Indices Policies & Practices 3

5 Additions and Deletions Addition and deletions of securities to indices can occur for a number of reasons. For indices that do not have a fixed number of constituents, additions and deletions are not linked to one another. For indices with a fixed number of constituents, whenever there is a deletion from an index, a pre-approved replacement is added to the index, preferably on the same day. In other instances, indices can have a fixed number of constituents at each rebalancing with the constituent count fluctuating between rebalancings. In these situations, if an index has a targeted constituent count of 30 or less and more than 10% of the constituent count between rebalancing dates is removed from the index due to mergers, acquisitions, takeovers, delistings, bankruptcies, or other reasons that warrant ineligibility, the index will be reviewed by the Index Committee to determine when replacement securities will be added to the index. Initial Public Offerings (IPOs). IPO additions to indices typically take place on the quarterly share rebalancing dates. Please refer to individual index methodologies for IPO inclusion criteria. Delistings. A security is generally dropped from all the indices it is a constituent of on or around its expected delisting date. Securities removed from an index due to voluntary delisting or failure to meet the exchange listing requirements, are removed at the primary exchange price, if available, or at a zero price if no primary exchange price is available. For U.S. listed securities, non-bankrupt securities are removed at the OTC or pink sheet price if no primary exchange price is available. If no OTC or pink sheet price is available, the security can be removed at a zero price at the discretion of the Index Committee. Please refer to Mergers and Acquisitions for information on delistings due to M&A events. Note: Every index methodology has its own guidelines and thresholds for determining additions and deletions, and the timing of these actions. Please refer to the respective individual index methodology for further clarity on the timing of changes to the given index. S&P Dow Jones Indices: Equity Indices Policies & Practices 4

6 Mergers & Acquisitions Merger & acquisition (M&A) activity often results in adds/drops to index membership and weight changes for constituents. The goal of M&A treatment in S&P Dow Jones Indices branded indices is to mimic the actual experience of index clients on a best efforts basis. All M&A events are tracked by S&P Dow Jones Indices index analysts and reviewed on a case by case basis. Clients are notified well in advance regarding treatment. An M&A target company is generally dropped from all indices on or around its expected delisting date. In certain instances, the target company may be dropped before its delisting date once an offer to acquire the security has been deemed unconditional. Generally, deletions are made using the closing price of the security on the deletion date. Deletions might be made using the deal price in certain markets. The deal price could be the tender offer price for cash takeovers or a derived deal price for partial stock/all stock takeovers. Clients are notified if any price other than market close prices or deal prices are used to drop stocks from S&P Dow Jones Indices. If the primary exchange suspends or halts an M&A target security prior to the S&P Dow Jones Indices announced effective deletion date, S&P Dow Jones Indices will remove the security at the market close price or the deal price, whichever is lower if the merger is all cash. S&P Dow Jones Indices will synthetically derive a price for the suspended security using the deal ratio terms if the acquirer is issuing stock as part of the merger. This synthetically derived price is used to calculate the index until the S&P Dow Jones Indices deletion date. If any other pricing mechanism is used that deviates from this policy, S&P Dow Jones Indices will make an announcement describing the alternative method to be used. The final decision regarding the pricing method is at the discretion of S&P Dow Jones Indices. All M&A driven changes to S&P Dow Jones Indices branded indices are implemented with one to five business days notice on a best efforts basis. Any share issuance for the acquirer is implemented to coincide with the drop event for the target. In certain situations, at S&P Dow Jones Indices discretion, de minimis merger and acquisition share changes may be accumulated and implemented with the quarterly share rebalancing. M&A share changes may be implemented weekly for an index company acquiring a privately held company or a non-index company that does not trade on a major exchange. Please refer to the Share and IWF Updates chapter for further information on timing of share changes. S&P Dow Jones Indices: Equity Indices Policies & Practices 5

7 Spin-Offs As a general policy, a spin-off security is added to all indices where the parent security is a constituent, at a zero price at the market close of the day before the ex-date (with no divisor adjustment). The spin-off security will remain in the parent s indices if it meets all necessary criteria. If a spin-off security is determined to be ineligible to remain in the index, it will be removed after at least one day of regular way trading (with a divisor adjustment). In certain instances, S&P Dow Jones Indices may decide to add the spin-off security to indices using a non-zero price and applying a price adjustment to the parent. In certain other instances, S&P Dow Jones Indices may determine not to add the ineligible security to the parent s indices due to de minimus value or lack of information on value of the spin-off security. If there is a gap between the ex-date and distribution date (or payable date), or if the spin-off security does not trade regular way on the ex-date, the spin-off security is kept in all indices in which the parent is a constituent until the spin-off security begins trading regular way. At the discretion of the Index Committee, an indicative or estimated price may be used for the spin-off entity in place of a zero price until the spin-off security begins trading. If the spin-off entity does not trade for 20 consecutive trading days after the ex-date and there is no guidance issued for when trading may begin, S&P Dow Jones Indices may decide to remove the spin-off security at a zero price with advance notice given to clients. Index composition changes involving the parent or spin-off company, including attribute changes, such as a change in its Global Industry Classification Standard (GICS ) classification, are implemented after the spin-off entity has traded regular way for at least one day. 1. Spin-off Security is a New Entity. The spin-off security will be added to all parent indices on the ex-date. 2. Spin-off Security is an Existing Publicly Traded Entity (In Specie Distribution). S&P Dow Jones Indices will add the in specie distribution to all indices in which the parent is a constituent on the ex-date at a zero price and will mimic the price of the existing publicly traded entity on the close of the ex-date. The distribution will be represented by a temporary placeholder security, which is a non-tradeable security created by S&P Dow Jones Indices to hold the place (weight) of the assets distributed, but not yet received by index clients. A temporary placeholder security is used discretionarily by S&P Dow Jones Indices to enhance an index client s ability to replicate an index. The temporary placeholder security will be added to indices in which the parent is a constituent using the parent s IWF and using shares equal to the distribution ratio times the parent s total shares outstanding. The placeholder security will be priced to match the price of the existing publicly traded entity. The existing publicly traded security will be added and/or upweighted to reflect the distribution on the same date that the temporary placeholder security is removed from indices, if applicable. In certain instances, S&P Dow Jones Indices may decide to apply a price adjustment to the parent and not add a temporary placeholder security. In all cases, advance notice of treatment is given to clients. 3. South Korea. In South Korea, a holding company often has a reverse split accompanying a spin-off of its operating entity. As a general index implementation policy for spin-offs accompanied by reverse splits in South Korea, a spin-off is made effective on the day the spunoff company starts to trade. The valuation of the spun-off company is calculated as the market capitalization of the parent company before the spin-off event multiplied by the spin-off ratio. S&P Dow Jones Indices: Equity Indices Policies & Practices 6

8 Treatment of Spin-Offs in Certain Equal Weighted and Modified Market Cap Weighted Indices S&P Dow Jones Indices defines a modified market cap weighted index as one where the final weight of an index component is derived with some consideration of the actual market capitalization of the company; but the constituents market capitalizations are re-defined to be values that will achieve the user-defined weighting at each rebalancing, which may result in the redistribution of weights across constituents. For most modified market cap weighted and equal weighted indices, both the parent and spin-off company generally remain in the index until the next index rebalancing. The spin-off company is added to the index at a zero price at the close of the day before the ex-date. No price adjustment is applied to the parent and there is no divisor change. All indices undergo a full review with the next rebalancing. However, if then, (i) the next index rebalancing is more than three months away, and (ii) either the parent company or the spin-off company is clearly not eligible for the particular index the spin-off company is reviewed on a case-by-case basis by the Index Committee and the appropriate treatment will be announced to clients in advance. In such cases, and when achievable, clients are provided with one to five business days notice to drop either the parent or child company (as applicable in the situation) in a market situation where regular-way trading is available for both the parent and child. If a decision is made to keep the spun-off company and drop the parent, because of a determination that the spun-off company is within the theme of the index while the parent no longer meets such requirements, the weight of the parent stock is (1) distributed proportionately across the rest of the index for a modified market cap weighted index or (2) added to the spun-off stock s weight in an equal weighted index. Alternately, if a decision is made to drop the spun-off company and keep the parent, because it has been determined that the parent company is within the theme of the index while the spun-off does not meet such requirements, the weight of the spun-off company is (1) distributed proportionately across the rest of the index for a modified market cap weighted index or (2) added back to the parent stock s weight in an equal weighted index. Affected Indices. All modified market cap weighted (including dividend yield weighted) and equal weighted indices. Modified market cap weighted and equal weighted indices based on another fixed count index whose adds and drops follow the parent index exactly (for example, the S&P 500 Equal Weighted Index) will continue to follow the add/drop policy of the parent as outlined in the following section. Equal Weighted Indices Based on a Fixed Count Parent Index. The spun-off company is added to the index at a zero price at the market close of the day before the ex-date with no divisor adjustment. If the spun-off company is replacing a dropped company in the parent index, on the effective date of the deletion, first the weight of the spun-off company is redistributed to the parent company, and then the weight of the deleted company is redistributed to the spun-off company. If the spun-off company is replacing the parent company, the weight of the parent is redistributed to the spun-off company on the effective date of the deletion. If the spun-off company will be dropped from the parent index, the weight of the spun-off company is redistributed back to the parent company. Refer to the respective individual index methodology documents for more information on the specific treatment for a particular index. S&P Dow Jones Indices: Equity Indices Policies & Practices 7

9 What If Scenarios: Q: What if there is a spin-off in a fixed count index? A: Indices with a fixed number of stocks will carry an extra stock for at least one day. Q: What if, for example, the parent is a constituent of the S&P Global Water Index and the spun-off company does not fall in the water category? A: The spun-off company will still be added in the S&P Global Water Index at a zero price for at least one day. Q: What if the spun-off company doesn t trade for a few days or weeks? A: In general, the spun-off company is held in the index at a zero price until trading begins. If the spinoff entity does not trade for 20 consecutive trading days after the ex-date and there is no guidance issued for when trading may begin, S&P Dow Jones Indices may decide to remove the spin-off security at a zero price with advance notice given to clients. Q: What if the spun-off entity trades on an ineligible exchange? A: This will depend on the market and Index Committee decision. For certain markets, it might be decided not to add the spun-off company to the index and either apply a price adjustment for the parent or not recognize the spin-off at all. For U.S. OTC markets, the spun-off company will likely be added for one day and then be removed once price discovery is known. Decisions will be made on a case-by-case basis and announced to clients with ample lead time, when possible. Q: Will there be infinite returns reported in data files for the spun-off stock on the close of the ex-date if it is added at a zero price at the close on the day prior to the ex-date and dropped at the market price at the close of the ex-date? How will the return of the parent be treated? A: Where a stock is included at a zero price and then trades, its return on the day is mathematically infinite. S&P Dow Jones Indices adjusts the % returns field in the constituent (.SDC) files to make it zero for the day. Similarly, since the closing price of the parent is not being adjusted downward as of the next day s open to account for the spin-off, the return on the parent for that day could be understated. S&P Dow Jones Indices calculates the return on the parent stock on that day by dividing the sum of the total closing index market cap of the parent stock and the spun-off stock by the closing index market cap of the parent stock on the day prior to spin-off. This gives a total return on the combined position of the parent and spun-off stock, and since the return on the spunoff stock is treated as zero for the day, this ensures that the single stock returns presented can be aggregated into the total index return. Q: What happens if the spun-off company trades in a different country from the parent? The spun-off company could be trading in a different currency, a different time zone and belong to a different country index as well. A: At the discretion of the relevant Index Committee, the spun-off company may still be added at a zero price to all indices in which the parent entity is a constituent, and be removed from those indices after it trades regular way for at least one day. S&P Dow Jones Indices: Equity Indices Policies & Practices 8

10 Share and IWF Updates Changes in number of shares outstanding, and subsequent Investable Weight Factor (IWF) updates, due to other events like secondary public offerings or tender offers, follow the 5% rule policy below which is standard across most S&P Dow Jones branded indices. However, in certain instances, local market practices may relax these rules so please refer to the respective individual index methodology for any deviations from this policy. The timing of adjustments to share counts or IWFs depends on the event causing the change, the public availability of source data, local market practices, and whether the change is 5% or more of the total share count. Changes of less than 5% of the total shares are accumulated and made quarterly on the third Friday of March, June, September and December. Changes to an index constituent s total shares of at least 5%: o o o Share/IWF changes due to mergers or acquisitions of publicly held companies that trade on a major exchange are implemented when the transaction occurs, even if both of the companies are in different headline indices, and regardless of the size of the change. The share/iwf change is applied so that it coincides with the deletion date of the target company if both the acquirer and the target are in S&P Dow Jones Indices branded indices. At S&P Dow Jones Indices discretion, de minimis merger and acquisition share changes may be accumulated and implemented with the quarterly share rebalancing. Other changes of at least 5% are applied weekly and are announced after the market close on Fridays for implementation after the close of trading the following Friday (i.e. one week later). Examples of such changes include: secondary public offerings (also known as placements), tender offers, Dutch auctions, exchange offers, bought deal equity offerings, prospectus offerings, company stock repurchases, private placements, redemptions, exercise of options, warrants, conversion of derivative securities, at-themarket stock offerings, and acquisitions of private companies or non-index companies that do not trade on a major exchange. If an exchange holiday/closure falls on a Friday, the weekly share change announcement will be made the day before the exchange holiday/closure, and the implementation date will remain after the close of trading the following Friday (i.e. one week later). If a change in shares outstanding of at least 5% causes a company s IWF to change by at least five (5) percentage points, the IWF is updated at the same time as the share change. IWF changes resulting from partial tender offers are considered on a case-bycase basis. Note: For equal weighted or indices using modified market capitalization weighting schemes, shares and/or IWF updates are only effective for the underlying shares or IWF. The stocks alternative weight factor (AWF) is generally modified to counteract the underlying shares/iwf change, so that index shares remain unchanged until the index is fully updated at its next scheduled rebalancing. Please refer to the respective individual index methodologies to confirm if an index follows this rule. Exceptions: 1. For some markets, when total shares outstanding increase by more than 5%, but the new share issuance is directed to a strategic or major shareholder, it implies that there is no change in floatadjusted shares. However, in such instances, S&P Dow Jones Indices will implement a total shares outstanding and resulting IWF change regardless of whether the float change is more than 5%. S&P Dow Jones Indices: Equity Indices Policies & Practices 9

11 2. For weekly share reviews involving companies with multiple share class lines, the 5% share change threshold is based on each individual multiple share class line rather than total company shares. 3. For the S&P Composite 1500, 5% share/iwf changes due to public offerings are made effective at the close on the same day under certain conditions. 4. For share reviews involving Australia and Japanese companies, please refer to the S&P/ASX Australian Indices Methodology and S&P Japanese Indices Methodology. Please refer to the S&P U.S. Indices Methodology for a more detailed description of the treatment in the S&P Composite Rebalancing Guidelines Share/IWF Freeze A share/iwf freeze period is implemented during each quarterly rebalancing. The freeze period begins after the market close on the Tuesday prior to the second Friday of each rebalancing month (i.e. March, June, September, and December) and ends after the market close on the third Friday of the rebalancing month. Pro-forma files are normally released after the market close on the second Friday, one week prior to the rebalancing effective date. In September, preliminary share and float data are released on the first Friday of the month. However, the share freeze period for September follows the same schedule as the other three quarterly share freeze periods. For illustration purposes, if rebalancing pro-forma files are scheduled to be released on Friday, March 13, the share/iwf freeze period will begin after the close of trading on Tuesday, March 10 and will end after the close of trading the following Friday, March 20 (i.e. the third Friday of the rebalancing month). During the share/iwf freeze period, shares and IWFs are not changed except for mandatory corporate action events (such as merger activity, stock splits, rights offerings). Exception: Share/IWF changes for S&P Composite 1500 constituents resulting from secondary public offerings that would otherwise be eligible for next day implementation are instead collected during the freeze period and added to the weekly share change announcement on the third Friday of the rebalancing month for implementation the following Friday night. There is no weekly share change announcement on the second Friday of a rebalancing month. Multiple Share Classes Companies issue multiple share classes in some instances. S&P Dow Jones Indices includes all publicly listed multiple share class lines separately in its float market cap (FMC) weighted indices subject to liquidity and float criteria currently in place for each index. Index membership eligibility for a company with multiple share class lines is based on the total market capitalization of the company. The decision to include each publicly listed line is evaluated line by line; the weight of each line will only reflect its own float, not the combined float of all company lines. It is possible that one listed share class line may be included in an index while a second listed share class line of the same company is excluded. Unlisted share class lines are not combined with any other listed share class lines, but these unlisted share class lines are included in the calculation of the company s total market capitalization. A company s total market capitalization is used to determine its assignment to either large-cap, mid-cap or small-cap indices. Once a listed share class line is added to an index, it may be retained in the index even though it may appear to violate certain addition criteria. Listed share class line deletions are at the discretion of the governing Index Committee. For companies that issue a second publicly traded share class to index share class holders, the newly issued share class line will be considered for inclusion if the event is mandatory and the market capitalization of the distributed class is not considered to be de minimis. S&P Dow Jones Indices: Equity Indices Policies & Practices 10

12 Note: Alternatively weighted indices that follow the composition of an S&P Dow Jones FMC index utilize the same composition as the parent index. For information on the treatment of multiple share classes for alternatively weighted indices, please refer to the respective index s methodology document available at Depositary Receipt Shares Depositary Receipt (DR) shares, including American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), are derived by multiplying the DR ratio by the underlying shares represented by the DR. S&P Dow Jones Indices: Equity Indices Policies & Practices 11

13 Dividends, Stock Splits and Consolidation Dividends Regular Dividend. A regular dividend is a distribution of a portion of a company's earnings to its shareholders. Regular dividends typically follow a quarterly, semi-annual or annual cycle and are most often quoted in terms of the payment amount each share receives (dividends per share). For index calculation purposes, a regular dividend will only have an effect on the Total Return (TR) and Net Total Return (NTR) indices and not on Price Return indices. Special Dividends. Special dividends are defined as those dividends that are outside of the normal payment pattern established historically by the corporation. Whether a dividend is funded from operating earnings or from other sources of cash does not affect the determination of whether it is a special dividend. Special dividends are typically larger than regular dividends and are quoted in terms of the payment amount each share receives (dividends per share). Generally speaking, there are no patterns for these events and they may simply be one-time payments. Special dividends are treated as corporate actions with price and divisor adjustments. For index calculation purposes, a special dividend results in a stock s price being adjusted (reduced) by the payment amount at the opening of the effective date. S&P Dow Jones Indices will generally consider the third consecutive instance of a non-ordinary dividend (in terms of timing, not amount) to be ordinary for index purposes as this third consecutive payment will generally be considered to be part of the normal payment pattern established by the company. Special dividends usually have the following characteristics: The company describes it as a special, extra, irregular, return of capital distribution from reserves, or some other similar term in the dividend announcement. Dividend payments not subject to a withholding tax are usually an indication that the dividend should be treated as special; however, large and out-of- pattern payments are still considered as special even if they are subject to a withholding tax. When an ordinary dividend is increased or decreased, it is still ordinary, not special. When a return of capital is declared in lieu of an ordinary cash dividend and fits the historical pattern of an ordinary dividend in amount and frequency, it is treated as an ordinary cash dividend. For example, many Swiss companies distribute a return of capital in lieu of ordinary dividends. When a dividend is paid the first time, it is ordinary unless the company s release specifically states otherwise. Return of Capital. A return of capital is a cash distribution of a portion of a company s share capital or capital surplus. As it is not paid out of net income or retained earnings, it is generally not subject to withholding tax. For index calculation purposes, a return of capital is considered a special dividend. However, when a return of capital is declared in lieu of an ordinary cash dividend and fits the historical pattern of an ordinary dividend in amount and frequency, it is treated as an ordinary cash dividend. Hybrid Dividends. Hybrid dividends, payable in cash & stock, can be considered as regular or special dividends by S&P Dow Jones Indices. Treatment is as follows: Hybrid Dividends Considered Regular Dividends. S&P Dow Jones Indices applies the full amount of the dividend on the ex-date (using the cash equivalent amount), and then increases the shares on the payable date regardless of whether the share increase is greater than 5%. S&P Dow Jones Indices: Equity Indices Policies & Practices 12

14 Hybrid Dividends Considered Special Dividends. A price adjustment is applied for the full amount of the dividend after the close of trading on the day before the ex-date, and a share increase is made on the payable date regardless of whether the share increase is greater than 5%. In certain instances, S&P Dow Jones Indices may decide to add a temporary placeholder security to represent the stock portion of the hybrid dividend when deemed necessary to enhance the replicability of the index and to reduce unnecessary turnover. In such cases, S&P Dow Jones Indices will announce the treatment details with one to five business days notice. Scrip Dividend. A scrip dividend is a dividend paid by the issue of new shares in lieu of cash. A company may offer its shareholders the choice of receiving a dividend in shares (scrip dividend) rather than cash. The share option is typically listed as the default option for the shareholders who do not make an election. Only the distribution received under the cash option is subject to dividend withholding tax. S&P Dow Jones Indices treats scrip dividends as cash dividends on the ex-date. Any share change due to a shareholder s election to receive shares will be subject to the standard policy on share changes a share change of 5% or more will be implemented intra-quarter while share changes of less than 5% will be accumulated for quarterly implementation. Dividend Treatments for ADRs and GDRs. For most American Depository Receipts (ADRs) and Global Depository Receipts (GDRs), cash dividends are declared in the local currency. While the dividend exdate for an ADR/GDR is known ahead of time, the depositary bank usually provides only an estimated dividend amount in the trading currency of the ADR/GDR based on the foreign exchange rates at that time. The final dividend amount calculated using the latest forex rates is not available until closer to the payable date. S&P Dow Jones Indices branded indices use the dividend treatment outlined below: (i) If the dividend is quoted ex by the exchange, this amount is used on the dividend ex-date. (ii) If the dividend is not quoted ex by the exchange, the dividend is not generally recognized for index purposes. An exception is Japanese and Korean ADR dividends which are generally not quoted ex by the exchange but are recognized on a future date if the depository bank issues a final dividend notice. See the Post Ex-date Dividend Adjustment section for further information on this exception. (iii) For certain Russian GDRs, the information regarding the dividend amount and ex-date is available only after the ex-date has passed. In these instances, S&P Dow Jones Indices may choose to recognize the dividend on the date S&P Dow Jones Indices becomes aware of the amount. S&P Dow Jones Indices does not wait for the payable date, which could be months away in some instances. Regional Variations in the Treatment of Cash Dividends UK. Cash dividends reported in the UK are net dividends, which is the amount used for index calculation purposes. UK dividends are taxed at the source from company profits after corporation tax has already been paid. Property Income Distributions (PIDs): PIDs are a special kind of dividend related to Real Estate Investment Trusts (REITs) and are taxed at a rate of 20%. REITs might declare dividends that are solely PIDs, solely ordinary dividends or a combination of the two. Example: Company A declares a dividend consisting of two components: a regular dividend of GBP and a PID component of GBP taxed at a rate of 20%. So, for index calculation purposes, the dividend amount for Company A is GBP Dividend = GBP GBP {0.015 * (1-0.2)} = GBP S&P Dow Jones Indices: Equity Indices Policies & Practices 13

15 Taiwan. When there is a suspension in trading that S&P Dow Jones Indices is aware of, the event is recognized on the date trading resumes. Examples: (1) The reverse split for 2887.TW was recognized on February 3, 2010, the pay date after the stock came out of its trading suspension instead of January 19, 2010, which was the ex-date. (2) The return of capital with the reverse split for 2412.TW was recognized on February 8, 2010, the pay date, after the stock resumed trading instead of its ex-date January 21, Japan. The majority of dividends in Japan are provided in estimated amounts on their ex-date. If an estimated dividend is provided, the estimated dividend is reinvested into the index on the ex-date. For companies that do not provide estimates but have a historical pattern of paying dividends, the estimate is calculated as the previous year s dividend amount adjusted for any split/bonus issues. If no dividend was paid in the same period the prior year and an estimated dividend is not available, no dividend amount is reinvested on the ex-date. Once the company announces the actual dividend amount, S&P Dow Jones Indices reinvests the difference between the estimated and confirmed dividend amount using the Post Ex- Date Dividend calculation methodology (see below). Korea. The majority of dividends in Korea are not announced prior to their ex-date. S&P Dow Jones Indices recognizes these dividends after they have been confirmed by the company. Please see the Post EX-Date Dividend calculation methodology below. Canada. S&P/TSX Canadian Indices have a minimum 4% of price threshold to recognize a dividend as special; For example, if the dividend is over 4% of the price of the stock, it is deemed to be a return of capital and the price of the underlying security is reduced by the dividend amount prior to the ex-date. In Canadian markets, income trusts sometimes pay special dividends. The mandate in their charter is to distribute all excess cash to unit holders. Periodically, they distribute this extra cash via a small special dividend, often with the same payment schedule (ex-date, record date, pay date) as a regular dividend. S&P Dow Jones Indices treatment is to add them together and treat it as a regular dividend. Brazil. Interest on Capital is generally recognized as a cash dividend, but is subject to a different withholding tax rate than an ordinary cash dividend. Turkey. Distributions from REIT companies are treated as cash dividends, but unlike cash dividends they are subject to a zero withholding tax rate. Australia. If a company announces that a dividend being paid is a special dividend, it is treated as a special dividend with a price adjustment. Where a company does NOT announce it as a special dividend, but the ASX or vendors do, the treatment will still match that announced by the company. It is uncommon for ASX listed stocks to repeatedly pay special dividends in patterns that resemble regular dividends. Franking. Australia has a tax structure where profits are only taxed once at either the company level or shareholder level; i.e., Australian companies pay out profits as dividends either before or after tax. The franking rate is what tracks whether or not the tax was already paid on the cash dividend. If the tax was already paid at the company level, then the dividend amount is fully franked (100% franked). If taxes were not paid on the cash distribution, then the dividend is 0% franked. Note that the franking rate can also be in between 0% and 100%. Conduit Foreign Income (CFI). CFI is foreign income received by a foreign resident via an Australian corporate tax entity. The tax relief for CFI ensures that those amounts are not taxed in Australia when distributed by the Australian corporate tax entity to its foreign owners. The Conduit Foreign Income removes any withholding tax liability for non-resident shareholders in relation to the CFI component of dividends received. Franking Credit Adjusted Total Return Indices. Additional total return indices are available for a number of S&P/ASX Indices that adjust for the tax effect of franking credits attached to cash dividends. S&P Dow Jones Indices: Equity Indices Policies & Practices 14

16 The indices utilize tax rates relevant to two segments of investors: one version incorporates a 0% tax rate relevant for tax-exempt investors and a second version uses a 15% tax rate relevant for superannuation funds. The franking credits attached to both regular and special cash dividends are included in the respective calculations. To calculate the gross dividend points reinvested in the Franking Credit Adjusted Total Return Indices: Grossed-up Dividend = [As Reported Dividend * (1-% Franked) + (As Reported Dividend * (% Franked/1 Company Tax Rate))] The Net Tax Effect of the franking credit is then calculated based on the investor tax rate (i.e. 0% for taxexempt investors and 15% for superannuation funds). Net Tax Effect = [Grossed-up Dividend * (1 Investor Tax Rate)] As Reported Dividend The Net Tax Effect of each dividend is then multiplied by the index shares of that company to calculate the gross dividend market capitalization. Gross Dividend Market Cap = Net Tax Effect * Index Shares These are then summed for all dividends going ex on that date and converted to dividend points by dividing by the index divisor Gross Dividend Points = Sum of Gross Dividend Market Caps / Index Divisor Franking Credit Adjusted Annual Total Return Indices. This index series accrues a pool of gross dividend points on a daily basis and reinvests them across the index annually after the end of the financial year. Reinvestment occurs at market close on the first trading day after June 30 th. The gross dividend points are derived by taking the value of the gross dividend market capitalization (less the as reported dividend market capitalization) and dividing it by the index divisor effective on the ex-date of the respective dividend. Franking Credit Adjusted Daily Total Return Indices. Rather than allowing a separate accrual of gross dividend points, this index series reinvests the gross dividend amount across the index at the close of the ex-date on a daily basis. Post Ex-date Dividend Adjustment Companies in Japan and South Korea do not typically confirm cash dividend amounts prior to the exdates. Estimated dividends are usually available for Japanese companies ahead of the dividend ex-date, and it is generally accepted to recognize the estimated amount on the ex-date. Korean companies do not usually provide an estimate for dividends. For both countries, actual dividend amounts are confirmed by the companies several weeks after the ex-date. S&P Dow Jones Indices determines the difference between the dividend amount recognized on the original ex-date and the confirmed dividend amount announced by the company. This dividend adjustment is applicable to Japanese and Korean companies listed in their home markets and overseas as depositary receipts (ADR/GDR). For Japanese and Korean depositary receipts (ADR/GDR), S&P Dow Jones Indices uses the final confirmed dividend amount announced by the depositary bank. An adjustment in terms of dividend points is applied to the affected indices weekly at the close of the following Friday without restatement to past index levels. Any dividend adjustment applied on Friday is announced one day in advance. If the following Friday is not a trading day, the dividend adjustment is applied on the next trading day. The dividend point adjustment for a particular index is calculated using the following formula: Index Dividend Point Adjustment = (D dt * S at ) / Divisor t S&P Dow Jones Indices: Equity Indices Policies & Practices 15

17 where: D dt S at = Difference between the original and the confirmed dividend amount; foreign exchange conversion, if applicable, is based on the exchange rate on the ex-date. = Index shares on the ex-date. Divisor t = Index divisor on the ex-date. The gross total return (TR) and net total return (NTR) versions of the dividend point adjustment are calculated. The TR index dividend point adjustment, which may be positive or negative, is added to the price index level on Friday for the calculation of the total return index that day. Similarly, the NTR index dividend point adjustment is used for the calculation of net total return. If there are multiple dividend adjustments to implement in an index, a separate index dividend point is calculated for each dividend adjustment. The index dividend points are then aggregated for the calculation of return index levels. In the event that a negative dividend adjustment results in an overall negative index dividend for the day, the gross and net total return series underperform the price return on the effective date that the dividend adjustment is applied. Exception: If a stock is not part of an index on the original dividend ex-date or the dividend adjustment implementation date, there is no dividend adjustment for that stock in that index. For indices formed by attributes applied to the headline composition, if a stock has an attribute change between the original exdate and the dividend adjustment effective date but remains in the headline index throughout the period, any dividend adjustment attributable to that stock would be applied to the headline index but not to the attribute indices. Foreign Exchange Conversions for Dividends When companies declare dividends in currencies other than their stock trading currency, the following rules are used for the dividend currency conversion: The dividend is converted using the forex rate on the ex-date for regular cash dividends. Special dividends are converted using the forex rate on the day prior to the ex-date (or two days prior for Asia Pacific). Please refer to individual index methodology documents to check which foreign exchange rates are used for index calculation purposes. For ADRs and GDRs, the dividend amount and currency provided by the depositary banks are generally used for index calculation. S&P Dow Jones Indices reserve the right to make exceptions to this policy and apply a dividend amount in an alternative currency announced by the company. Multiple Dividend Distributions on a Single Day When there are multiple cash dividends on a single day, S&P Dow Jones Indices will combine them into a single amount for implementation. If the different dividends or multiple components of a single dividend are subject to different dividend withholding taxes, the standard withholding tax rate for the country will be used and the gross dividend amount may be adjusted accordingly. Dividend Not Quoted Ex by the Exchange At times, when companies declare a conditional dividend (contingent upon some event taking place (e.g. a merger, Board approval, etc.), S&P Dow Jones Indices might still decide to recognize it. In such cases, clients will be notified in advance. Bonus Issues of Shares Not Entitled To Cash Dividend In certain global markets there have been cases where bonus issues of shares are not entitled to a dividend effective at a later date. S&P Dow Jones Indices: Equity Indices Policies & Practices 16

18 Treatment is as follows: Apply the bonus issue on the ex-date Adjust the dividend effective at a later date accordingly (i.e. decrease the dividend amount in order to adjust it over the new number of shares including those resulting from the bonus issue). Total Return and Net Return Indices Gross and net total return indices are calculated for most S&P Dow Jones Indices branded indices. Cash dividends are generally applied on the ex-date of the dividend (market exceptions are noted in this document). Net return indices reflect the return to an investor where dividends are reinvested after the deduction of a withholding tax. Withholding Tax. This is the amount withheld by the company making a dividend payment, to be paid to the taxation authorities. In the context of S&P Dow Jones Indices branded indices, this refers to the tax that non-residents are subject to, when the country in which the company paying the dividends is incorporated is not where the shareholder resides. In most countries, domestic shareholders are not required to pay this tax. Tax treaties between countries may reduce the amount of withholding tax required. Data on tax rates are reviewed annually by S&P Dow Jones Indices. They are sourced and verified with independent data sources, including but not limited to the Worldwide Corporate Tax Guide published annually by Ernst & Young. Stock Split and Consolidation Stock Split. A stock split is a corporate event which increases the number of a company s shares, while simultaneously reducing its per share price, such that the market capitalization of the company remains the same before and after the event. Stock splits are quoted in terms of shares received to shares held. The shares of a company are increased (multiplied) by the stock split adjustment factor (greater than one), while the price is decreased (divided) by this same factor. In a 5-for-1 stock split the adjustment factor is 5, so the shares outstanding is multiplied by 5 while the price is divided by 5. Stock Dividend. Stock dividends work exactly like stock splits, except these are quoted in terms of the percentage of shares received to those held. A 5% stock dividend is the same as a 1.05-for-1 stock split with an adjustment factor of Bonus Issue. A bonus issue is quoted in terms of shares received to shares held, like stock splits, or quoted in percentages like stock dividends. Stock splits, stock dividends and bonus issues are similar terms. They essentially imply the same action; the only difference is in the way the terms are quoted. So, a 1-for-20 bonus issue is the same as a 21:20 stock split, which is the same as a 5% stock dividend. Consolidation. This is the exact opposite of a stock split. In a consolidation, the shares of a company are decreased while its per-share-price is increased by the adjustment factor (less than one). Also like a stock split, the overall market capitalization of the company remains unchanged by this event. Also referred to as a Reverse Stock Split. S&P Dow Jones Indices: Equity Indices Policies & Practices 17

19 Reverse splits are quoted in terms of shares received to shares held. The shares of a company are decreased (multiplied) by the adjustment factor, while the price is increased (divided) by this same amount. The adjustment factor for a reverse split is determined just like in a stock split (shares received/shares held). S&P Dow Jones Indices: Equity Indices Policies & Practices 18

20 Rights Offerings (or Rights Issues ) A rights issue is an event in which existing shareholders are given the right to buy a specified number of additional shares from a company, at a specified price ( rights or subscription price), within a specified time ( subscription period ). Only rights available to all shareholders are recognized. For all markets (Developed, Emerging, and Frontier), irrespective of whether the rights are renounceable and/or fully underwritten, S&P Dow Jones Indices implements the following treatment: Price adjustments are applied at the opening of the rights ex-date as per the calculations shown below. Share changes are also applied at the full rights ratio at the opening of the rights ex-date. If the rights are undersubscribed or oversubscribed, the corresponding share adjustments are made at the next quarterly share rebalancing, if the change is less than 5%. If the change in shares is greater than 5%, these changes might be made sooner, at S&P Dow Jones Indices discretion, to coincide with a future weekly share change. If the new shares are not entitled to a future dividend, which has been announced and where the amount is known, the price adjustment calculation will reflect the dividend (the dividend amount will be added to the subscription price). This applies to both ordinary and special dividends. Please see calculations shown below. S&P Dow Jones Indices Calculation of Rights Offerings STEP 1: Determine if the rights offering is in-the-money or out-of-the-money: If the subscription price < the stock closing price on the day before the ex-date, then the rights offering is in-the-money If the subscription price the stock closing price on the day before the ex-date, then the rights offering is out-of-the-money Note > In several cases with rights offerings, the new shares are not entitled to a future dividend. If a future dividend is announced by the day before the ex-date of the rights, the dividend amount has been confirmed and S&P Dow Jones Indices is certain that the newly created shares as a result of the rights offering are not entitled to the dividend, the following rule are used to determine if a rights is in-the-money or not: If the subscription price + dividend < the stock closing price on the day before the ex-date, then the rights offering is in-the-money If the subscription price + dividend the stock closing price on the day before the ex-date, then the rights offering is out-of-the-money STEP 2: If the rights offering is in-the-money, apply the price and share adjustment on the exdate: S&P Dow Jones Indices practice is to only recognize rights that are in-the-money. The assumption is that main clients are long-only indexers and, as rational investors, they will exercise any rights that are in-themoney to mimic the index and keep tracking error minimized. Indexers will not exercise issues that are out-of-the-money, as they are trading at a premium to the current market price. S&P Dow Jones Indices: Equity Indices Policies & Practices 19